Chahabar – and US-Iran tensions

July 7, 2017

By Lt. General P.C. Katoch (Retd)
Former Director General of Information Systems, Indian Army

The trilateral engagement between India, Iran and Afghanistan during the visit of Prime Minister Narendra Modi to Iran in May 2016 was historic, expanding avenues of trade for India with Iran, Afghanistan, Central Asia and Russia through the International North South Transportation Corridor (INSTC). Chabahar is Iran's only oceanic port and consists of two separate ports named 'Shahid Kalantari' and 'Shahid Beheshti', each of which have five berths – overall 10 berths. India and Iran first agreed upon plans to further develop 'Shahid Beheshti' port in 2003, but India was deterred by sanctions against Iran. Under the Indo-Iranian agreement of May 2016, India would refurbish one of the berths at 'Shahid Beheshti', and reconstruct a 600 meter long container handling facility at the port. The bilateral agreement between India and Iran gives India the right to develop two berths of the Chabahar port as agreed in 2015, allowing them to be operated for 10 years by India Ports Global; joint venture between Jawaharlal Nehru Port Trust and Kandla Port Trust, in partnership with Iran's Aria Banader. Along with the development of Chahabar port, India is also to construct a railway line linking Chahabar with Zahedan on the Iran-Afghanistan border, which beyond Zahedan will be linked to the Iranian Railway running west and then north close to the Iran-Afghanistan border, avoiding the volatile Helmand Province of Afghanistan. India's development of Chabahar will be at a cost of $85 million over the course of 18 months. Upon completion of upgrade works agreed to in May 2016, Chabahar's capacity will be increased to 8 million tons from the current 2.5 million ton capacity.

India's investment is supplemented with a $150 million credit line to Iran through Exim Bank of India. India has also offered to supply $400 million worth of steel towards the construction of the rail link Chabahar-Zahedan. Chabahar port and the INSTC give India the strategic access for trade with Afghanistan and Eurasia, faced with denial of the land route through Pakistan. Recent operationalizing of Gwadar port, as also the CPEC, makes this even more significant. Gwadar port has been leased for operations to a Chinese company (read China) for 49 years. In December 2011, regional Pakistani newspapers reported Chinese military taking over Gilgit Baltistan and Pakistan considering leasing Gilgit-Baltistan to China for 50 years, which would have happened already. In 2011, Beijing and Tehran signed a deal giving China exclusive rights to multiple several Iranian oil and gas fields through 2024, including rights to build complete necessary infrastructures. In return, China promised to treat any foreign attack against these regions as attacks against its own sovereign territory, and defend them as such. China needs no prior permission from Iranian government to maintain and increase its military presence in Iran, and will control the movement of Iranians in and out of these territories. According to Green Experts of Iran, this agreement was the basis for PLA's General Zhang Zhaozhong stating, "China will not hesitate to protect Iran even with a third World War."

China and Iran aim to increase bilateral trade to $600 billion within the next decade, even though economists feel it is not attainable. Under the Indo-Iranian agreement of May 2016, India is required to deliver the Chahabar project in 18 months – by end 2017 but that does not appear possible now because of deteriorating relations between the US and Iran. The US House of Representatives has now voted to renew the Iran Sanctions Act for an additional 10 years; the act is scheduled to expire by year's end, barring its renewal. As of now there is no word on when the US Senate intends to vote on the extension but Iran maintains that even non-nuclear sanctions, particularly the prohibition on Iranian access to the American financial system and use of the dollar discourage foreign companies from investing in Iran, subverting the economic rewards it expected from the nuclear agreement.

India committed $500 million to speed up development of Chahabar after sanctions on Iran were lifted but India's Ports Global Pvt Ltd has not been able to award a single tender for cranes and forklifts etc. Swiss engineering group Liebherr and Finland's Konecranes and Cargotec, both of which dominate the market for customized equipment to develop jetties and container terminals, maintain they are unable to take part in the bids as their banks are not ready to facilitate transactions involving Iran due to the uncertainty over US policy. The lifting of UN and EU sanctions in 2016 partly reconnected Iran with the international financial system but large international bankers remain unwilling because of the US stance, especially due to possibility of unilateral US sanctions that may be imposed irrespective of the nuclear deal. There is little progress on the Iranian side as well; even an initial credit line of $150 million that India wants to extend to Iran for development of Chabahar has remained a non-starter as Tehran has not been able to do its part of work. So, the 18 month deadline for completion is impractical, especially with the Indian Ambassador to Iran stating that "some of the customized cranes needed take up to 20 months to build". When India commenced developing Chabahar and how much has been completed is not known, but there is need for speed. Early leveraging the Indo-Japanese partnership into the project and ironing out problems of fiscal investment on account of sanctions is required. For cranes and forklifts, perhaps Russia could be tapped, which has adequate expertise and would be interested in Chahabar given its benefit to the INSTC.

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